2020 Outlook for Boosting Portfolio Growth and Income Roger S. Conrad Conrad’s Utility Investor Washington D.C. AAII January 2020
Briefing Objectives • Capitalist Times: Low Risk, High Return Strategies for Every Investor • The Big Picture: Investing for Income in 2020 • Dividends Plus: Tactics and Strategies • Sectors for Your Personal Watch List • Picks and Pans for the Long and Short-Term • Q&A
The CT Team • A Century of Combined Professional Experience Picking Stocks and Calling Markets • Varied Client Base — Individuals to RIAs, institutions and fund managers • Wide range of experience on all sides of the investment business —”Newsletter” advisories to major bond trading firms and fund boards
Tailored Strategies for Investors • Conrad’s Utility Investor • Deep Dive Investing • Energy and Income Advisor • Pig Versus Bear
It Was A Very Good Year
….Though Not So Much for Energy
Benchmark Rates Went Lower….
…But Growth Drove Stock Prices Year S5TELS DJUA BBREIT ALERIAN MLP S&P 500 TNX 2019 32.7 27.3 27.7 6.3 31.5 -28.6 2018 -12.5 2.0 -4.6 -12.4 -4.4 11.7 2017 -1.3 13.3 9.0 -6.5 21.8 -1.7 2016 23.4 18.2 9.0 18.3 12.0 7.8 2015 3.4 -3.1 3.2 -32.6 1.4 4.6 2014 3.0 30.7 29.1 4.8 13.7 -28.2 2013 11.5 12.7 2.4 27.6 32.3 72.3 2012 18.3 1.6 18.6 4.4 16.0 -6.1 2011 6.6 19.7 8.1 13.9 2.1 -43.4 2010 19.0 6.5 29.5 35.6 15.1 -14.0 2009 8.9 12.5 29.2 75.7 26.5 71.3 2008 -30.5 -27.8 -37.9 -37.1 -37.0 -44.4
Key Question: Recession Ahead? • US and global economy apparently slowed in 2019 from 2018 • Manufacturing contracting with PMI under 50 since spring 2019 • Uncertainty from trade disputes though some agreements reached • Capital spending lags
US Manufacturing PMI January 20 10
But Not There Yet • Our 10 point Deep Dive Investing recession warning checklist still has only 2 indicators flashing red: Full Discussion this month on our “World As It Is” Roundtable • No Recession = No Bear Market • Capital Spending Lags but there’s money
Macro: Conference Board LEI, MoM Tracking for zero or negative readings in at least three of the past six months
Market to Force Investment Rebound? January 20 13
Whither the Fed and Rates? • “Effective” Fed Funds rate well below 2% • Fed has all but abandoned “Tightening” for now, unlikely to resume in an election year • Inflation still a no show • Markets have gotten used to disruption • Income stocks can perform well when Fed tightens if economy is still growing
ETFs Are Changing Market Structure
DJUA Valuations: Flashing Yellow Year P/E Yield Pr/EBITDA Pr/Book EV/Sales 2020 22.8 2.9 8.36 2.36 5.01 2019 22.8 2.9 8.36 2.36 5.03 2018 17.5 3.4 8.26 1.92 3.90 2017 18.7 3.3 6.46 2.01 3.82 2016 17.7 3.4 7.26 1.91 3.61 2015 16.2 3.7 5.17 1.67 3.10 2014 18.1 3.2 5.94 1.88 3.09 2013 16.7 4.0 5.30 1.63 2.84 2012 15.1 4.2 4.71 1.56 2.60 2010 12.7 4.3 3.95 1.51 2.21 2009 12.5 4.2 4.09 1.56 2.18 2008 11.6 4.4 3.56 1.54 1.86 2007 17.2 2.8 5.55 2.39 2.39 2002 10.1 5.3 2.67 1.34 2.10 2000 23.5 2.9 5.14 2.45 0.88
Income Investing Outlook • Valuations/Investor Expectations back to all-time highs, disappointment can be deadly • Economy/Earnings are primary drivers of investor returns. The Fed and interest rates are only important as they relate to growth • No Recession yet, full-on bear market is unlikely without one • Expect wide momentum swings, even in so-called low Beta stocks • Stock picking will beat index investing in 2020 as it did in 2019
CT Income Strategies • CUI Plus • High Income Energy • High Income Options • The REIT Sheet • Utilities/Essential Svc
IN QUALITY RATINGS WE TRUST • Dividend Growth and Sustainability • Revenue Reliability • Regulatory/Legal Relations and Risks • Refinancing/Financing: Need for and Access to Low Cost Capital • Operating Efficiency One hand washes the other….
Under no circumstances will we… • Buy and forget or “Hold and Hope” • Chase the highest yield or ignore valuation • Chase momentum or run from it • Load up on hot sectors and stocks and ignore out of favor investments…and vice versa! • Not hold some cash
Sector Selector What’s Hot in Income What’s Not • Equity REITs • Energy MLPs • Financials • Most non-US utilities • Investment grade bonds • Most Mortgage REITs • Non-MLP Midstream • Resource companies • US Regulated utilities • Smaller telecoms (Electrics, nat gas, water) • Super Oils • Renewable energy • Selected industrial stocks
Own Them All
Diversification Means… • Since no one position can do real damage, you can afford to take more risk with individual investments, thereby capturing more income • Outperformers balance out underperformers in a typical market environment • You still have to do the work to maximize returns by finding the best buys at the best possible prices
Utilities: New Highs this Month
Outlook: Utilities Positives Negatives • Companies in most states • High Valuations for top are on the same page with quality stocks means easy to their regulators disappoint expectations • Underlying businesses are • ETFs dominate many names the healthiest in decades, increasing volatility, CAPEX spurring earnings momentum has impact and dividend growth • Election year politics • Trend is for laggards to close elevate risk valuation gap with sector leaders
Primary Growth Driver
Is NextEra A Growth Stock? • Certainly priced as one at 28.8x consensus expected 2020 earnings per share • Premium to the S&P 500 at 18.9x, DJUA 20.8x • Guidance growth 6-8%/yr below S&P 9.9% • Paying premium for safety not unknown, especially almost 11 years into a bull market • Valuation probably lasts as long as wind/solar adoption is a hot investing theme
Exelon Corp (NYSE: EXC) — Loaded Laggard with Early 2020 Drivers Yield = 3.14% Dividend growth rate 5%, next increase Jan 28 2018 YTD Return: 4.1% Why the underperformance: 1. Wholesale market exposure has pressured profitability of nation’s largest fleet of nuclear plants last few years 2. Company caught up in federal investigation of Illinois state officials, may threaten state’s pending Clean Energy Jobs Act despite support Why a recovery: 1. Illinois still likely to pass CEJA, has broad support. Would allow company to keep all nukes open in the state for at least the next several years 2. Illinois would exit PJM with CEJA, other states likely to follow suit to avoid Trump FERC policies, will advantage nuclear 3. Regulated utilities thriving and growing from nuclear unit’s free cash flow 4. Dividend increase next month 5. Stock at 14.2X 2020 EPS guidance.
Big REITs Running on Empty?
Outlook: REITs Positive Negative • A wide range of businesses • Industry leaders in organized under REIT traditional REIT areas are structure priced at historically high valuations • Growing economy is good • ETFs dominate many names for business and dividend growth increasing volatility • Bargains still available • Most are exposed to a among niche, lesser known potential recession, and smaller REITs however unlikely, and aren’t priced for the risk
Brookfield Property REIT (NYSE: BPR) — Unique Niche with a Big Yield Yield: 7.14% 12-Mo Dividend Growth: 4.8% Market capitalization $1.2 bil, BBB- stable credit rating Parent Brookfield Asset Management owns 18.53% and is key sponsor Key Growth Drivers: 1. Demonstrated record of success repurposing floundering retail and office properties, most recently the former General Growth Properties’ shopping centers 2. Dividend increase in early February 3. Demonstrated ability to access capital with conservative financing strategy 4. Well covered distribution with 25.6% last 12 months payout ratio.
Outlook: Midstream Positives Negatives • • Best in class have had 5 years to Still too many midstream adjust to lower for longer oil and companies in US gas prices and softer shale output • Ongoing stress test caused by • Dividend coverage is highest and reduced output from shale debt leverage the lowest in at least producers is likely to trigger more a decade distribution cuts and even • LNG exports and lack of bankruptcies and liquidations infrastructure serving key basins still offer enormous investment • Investors distrust the MLP model opportunities and dividends paid by midstream • Challenges building new pipelines companies in general elevated value of existing ones • Most have high cost of capital • Proving resilience in the stress test and exposure to commodity ensures windfall gains from current price levels prices
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